Why Jeff Bezos Is Worth $200 Billion
A California court decision holding Amazon liable for products sold by merchants tells the story.
|Matt Stoller||Aug 29, 2020||48||56|
Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…
Today I’m writing about what distinguishes Amazon from other companies. It is not what one might expect, which is Amazon’s innovative business model, but the corporation’s political savvy in exploiting our our weakened political system. Bezos’s $200 billion fortune is built on a corporation that knows how to use politics to destroy its competition.
I’ll also touch on some details about the coming Google antitrust case, the war Epic Games kicked off with its suit over Apple last week, and cheerleading monopolist Varsity Brands and its latest move to enter the marching band space.
Some house-keeping. First, I wrote up something for the American Compass on how monopolization is a challenge for both political parties. Second, I have a question for you, since I want to get to know my readers better. Are you reading a book right now? If so, what are you reading? I’m reading The People, NO by Thomas Frank and The Pennsylvania Railroad, Volume 1 Building an Empire, 1846-1917 by Albert J. Churella.
Why Jeff Bezos Is the Richest Politician in the World
A little over a year ago, the Wall Street Journal published a story on the thousands of unsafe or fraudulent products being sold on Amazon by third party merchants. If you talk to anyone who deals with branding and Amazon, counterfeit or defective products are a regular complaint. Defective products cause consumers harm and third party brand damage, and is the one area where Amazon actively and obviously harms consumers. Jeff Bezos even remarked on it in front of Congress during the antitrust hearings.
Last week, Amazon made an interesting political moves to tackle defective product sales, seeking to change not only its own business, but also the laws that governs liability for defective products. How the corporation acted, the flexibility of its political and legal strategy, goes a long way towards explaining why Jeff Bezos is the richest man in the world, far more so than anything Amazon has done in terms of business or technological innovation.
Here’s what happened.
Who Has to Pay for an Exploding Laptop Battery?
A few years ago, an Amazon Prime customer, Angela Bolger, bought a laptop battery from a third party merchant on Amazon. The battery exploded, injuring her. Bolger sued Amazon. She didn’t know she was buying from a third party merchant, she thought she was buying from Amazon. She also hadn’t known the battery came from a Chinese producer she couldn’t reach legally, and she had had no communication with the merchant.
Bolger lost the case at the lower court level, as most Amazon customers have until relatively recently. As Sean Bender wrote in a law review article reviewing Amazon and the doctrine that governs defective product sales, “Amazon’s customers are almost never successful in holding the company liable for defective products sold by its third-party vendors, even when those vendors cannot be sued directly because of insolvency, extraterritoriality, or both.”
Amazon’s ability to avoid liability for third party sellers who use its platform has given it a competitive advantage. While retailers like Walmart and Best Buy would certainly be liable for a defective battery sold in its store, Amazon, the lower court concluded, can simply offload that responsibility to third party merchants. Amazon, at least where its third party marketplace is concerned, is a mere online marketplace, not a retailer.
Amazon didn’t just argue that it lacks liability because it is merely a marketplace. It also argued that under the telecommunications law, Section 230 of the Communications Decency Act (a law I have written about), it merely hosts ‘speakers’ on its platform. Even as it creates a massive logistics and payments empire all merchants must use, with detailed rules on packaging, customer service, prices, and insurance, legally speaking Amazon posed as an innocent match-making speech platform.
Such an aggressive legal approach is not new for the corporation. Amazon’s strategy has always been designed to take advantage of legal ways to avoid taxes, push costs onto others, and give itself advantages in the marketplace. It did this for years by avoiding sales taxes its competitors had to pay; product liability claims in its third party marketplace are yet another example.
The legal standard under which such claims occur in selling goods and services is known as ‘strict liability,’ which means that the party at fault can be held to account regardless of whether they meant harm. Someone making a defective product is liable for the harm that product causes. But the doctrine creates a problem if there are multiple actors in a sales chain - is a retailer responsible for selling a defective product, or just the manufacturer?
Generally speaking California courts have said, yes, retailers are responsible as well (though strict liability doctrine differs by state). “Beyond manufacturers,” said a California appeals court in 2008, “anyone identifiable as ‘an integral part of the overall producing and marketing enterprise’ is subject to strict liability.” Essentially, if you are a pivotal part of the “stream of commerce,” you are responsible for whatever is sold.
So far, so good for Amazon, they kept their advantage by somehow evading being made a part of the marketplace. But then something unexpected happened after the lower court ruled in Amazon’s favor. Bolger appealed, and a California appeals court took her side. In overruling the lower court, the appeals judges said Amazon is liable for the exploding laptop battery, even though it is not the party that directly transferred title of the good to the end buyer.
The California Appeals Court decision is firmly and aggressively anti-Amazon, as if the judges were annoyed at the premise Amazon portrays itself as a mere powerless vessel for commerce. The court noted Amazon took the product from the merchant, stored it, attracted the customer, offered the product listing, handled the payment and logistics, and even “shipped the product in Amazon packaging.” Amazon also controlled how the merchant could sell on its site, limited the merchant’s access to the customer’s information, forced the merchant to communicate with the customer through Amazon, and “demanded indemnification as well as substantial fees on each purchase.” Amazon was no powerless actor, the court concluded, but was, as common sense suggests, “pivotal” in the transaction. Thus, Amazon carries strictly liability for products its merchants sell.
Moreover, the argument about how Amazon merely hosted speakers, and was thus protection by Section 230, merited little more than a few paragraphs of the judges pointing out that putting things in boxes and selling them isn’t speech. In other words, the court carefully showed that without Amazon’s existence, the transaction wouldn’t have happened. Amazon’s importance in the marketplace, not that Amazon sees itself as an online marketplace, is the key element at work.
Such a loss, especially in the significant California market, is quite problematic for Amazon. Aside from the Bolger case, there are multiple attempts to challenge Amazon on the legal problem of who is liable when a faulty product is sold through its marketplace. There’s the Pennsylvania case Oberdorf v. Amazon involving a defective dog collar, the Arizona case State Farm v. Amazon regarding defective hoverboards, and the Tennessee case Fox v. Amazon, again with a defective hoverboard purchase.
It’s not just the courts beginning to rule against Amazon. The lack of product liability by Amazon is something California legislators, led by Assemblyman Mark Stone, have been attacking for some time with proposed legislation, AB 3262. There are Federal bills as well, and states are beginning to consider rules to equalize the playing field. With this California court case, Amazon seemed to realize its days of allowing defective products to be sold through its platform are likely over.
What speaks to the savvy of Amazon is how the corporation reacted to its loss. After the court ruled, Amazon public policy lead (and former FTC and DOJ Antitrust official) Brian Huseman then swung into action. Last Friday, he published a blog post reversing Amazon’s position.
Not only did Amazon support legislative action to hold itself strictly liable for products sold on its platform, Huseman wrote, but it would support legislation to go beyond the court’s decision. Huseman said Amazon supported Stone’s bill on online marketplace liability, but Amazon wanted it to be even stronger and broader. Amazon, after being held liable in court for hurting someone by selling defective products, would pose in a legislative fight as the consumer’s biggest champion.
Huseman is an increasingly important player in the Amazon public policy shop, and as Amazon is a creature of public policy, it makes him one of the more important executives at the corporation. Former Obama press secretary Jay Carney, who ostensibly runs global affairs for Amazon, is a public relations guy and glad-handler of political VIPs, whereas Huseman, though behind the embarrassing HQ2 fiasco, does understand law.
The California bill, AB 3262 in its original form (which my organization endorsed in our report on Amazon), would have forced Amazon to take responsibility for what merchants sold on its platform, but the court decision essentially took care of this problem for the legislators. .
Huseman, recognizing that Amazon will have take responsibility for what it sold, in turned asked the legislature to apply strict liability to anyone remotely connected to selling things online. Not only should Amazon be held liable for products its merchants sell, wrote Huseman, but all online platforms or websites should be liable, not just for helping to place products into the marketplace but under any business model. The ultimate language of the legislation included not only placing products into the marketplace, but ‘facilitating’ the placing of such products into the marketplace.
With this broader standard, a whole host of other actors might become liable, from non-Amazon platforms like eBay to companies like Shopify, which is an infrastructure provider that sells online storefronts and logistics to companies that want to compete with Amazon. The changes Huseman requested, and Stone placed in the bill, might even make advertisers liable if their clients paid them to advertise goods that are defective. Amazon doesn’t just want to make Amazon safe for consumers, but the entire world.
Such a shift can sound like music to the ears of someone who wants to protect consumers. After all, if Amazon has conceded that it has to protect consumers and will support a law to do just that, isn’t that a victory? And isn’t it even better that Amazon wants the bill strengthened and applied to everyone? What kind of crusading consumer rights leader wouldn’t love a consumer protection bill as broad as that? And it worked. Here’s Stone, the sponsor of AB 3262.
"I never thought I’d be sitting down, seeing eye-to-eye, with Amazon," said Assemblymember Mark Stone (D-Scotts Valley) in an interview Monday. "I figured they would always fight this. But they’re realistic. They know what’s coming and they know they are going to have to deal with it."
From Stone’s perspective, consumers deserve to be protected, and if Amazon wants to take proactive measures to protect those who buy on its platform and eBay doesn’t, then eBay is the bad actor. After all, eBay has instances of fraud, certainly buying goods off of Craigslist has no guarantees of quality and trafficking in defective goods are a regular occurrence online, as they are offline. Paypal, though a payment network and not an online marketplace, is no saint. And certainly online marketplaces have sought to escape liability for dealing with defective goods, liability that offline retailers have to hold for the products they sell.
But the question here is not so simple as Amazon’s Huseman puts it, to create equal liability between all online marketplaces. Because the reality is that Amazon is not just an online marketplace, it is an extraordinarily powerful retailer, infrastructure provider, and online marketplace all at once, and that difference in market power matters. There are three reasons to be wary of a broadened legislative standard.
First, to make an analogy, what Amazon was asking for is the equivalent of making not only retailers and manufacturers for defective products, but also potentially the malls in which those stores are located, as well as the newspapers in which stores advertise their wares, the payment systems they use to take money, the decorator who helps arrange storefronts, or anyone else who ‘facilitates’ the commerce.
One might imagine this analogy is an exaggeration, and that not all these entities will be held liable. And that’s possible. You see, what’s powerful about the language Amazon recommended is that its meaning will have to be worked out by the courts, which is of course the point. The goal is to force anyone who might want to compete with Amazon to put themselves in legal jeopardy. Amazon essentially has imposed a lawyer tax on all its competitors and anyone who might consider selling to its competitors.
Second, and more importantly, the court took care of the problem already, so it’s not clear what this additional legislative language adds. If eBay is integral to the chain of marketing and sales, then eBay will be strictly liable for products sold on its platform. There isn’t a clear problem that broader legislation is solving.
Third, Amazon isn’t the same as any other online marketplace, it isn’t really an online marketplace at all. Amazon’s infrastructure investments and control over its supply chains and merchants is unparalleled. Amazon has its own ships, airplanes, warehouses, trucks, and postal system, and is perhaps the single most important logistics player in America. Amazon has even patented a way to understand and regulate the entire supply chain of everything that anyone selling through Amazon. Amazon is clearly integral to the marketplace and can control the stream of commerce in a way that few others can.
In other words, what started as a bill to make sure Amazon would be held liable for defective products it sold, essentially codifying a court case that already made that happen, has now turned into a legal weapon Amazon can use against its competitors, who have nothing remotely like the level of control over the stream of commerce that Amazon has, or the ability to deploy resources to organize it.
One way to think about it is that Amazon is basically saying, yes, we’ll make everything safe for consumers on Amazon’s marketplace, but on the condition that Amazon becomes the only marketplace. And this demand for more power is done in the name of consumer rights. Stone isn’t wrong to see such a bill as an extremely strong pro-consumer measure. The problem is that it also helps concentrate market power in a way that isn’t necessary to protect consumers.
Who Is Really Being Targeted?
Who is Amazon really targeting with this move? Clearly it wants more liability on potential competitors who might find ways of intruding on its business, ones that don’t even exist yet. But there are plenty of giants about which Amazon is wary. For instance, there’s Google, which has a shopping service and has a competitive audio assistant to Amazon’s Alexa. There’s also Facebook, which just created a new line of business to let people buy instantly through Instagram using Facebook’s payment option, the goal being a frictionless experience where Facebook can manage the commercial link between merchants and customers.
Facebook and Google are also massive advertising companies, which puts them in the crosshairs if advertisers have to carry strict liability for products they are paid to feature. Amazon, not coincidentally, has a large advertising business, third in the country after Google and Facebook.
A more interesting example of a potential victim is Shopify, which is not a retailer at all, but an infrastructure provider that helps customers (small ones, but also big ones like Staples and Heinz) run online storefronts. I’ve been hearing about Shopify as the Amazon competitor for awhile, here’s an explainer from Patrick Sisson on what the company is:
The Canadian-born e-commerce platform has become one of the most influential players in online retail. Currently more than 1 million merchants around the globe use the company’s technology to open their own digital storefronts and sell goods on the internet, creating a constellation of independent, and decentralized, stores (unlike marketplaces like eBay or Etsy)
Launched in 2006 by three friends who couldn’t find an e-commerce solution for their nascent snowboard company, Snowdevil, and decided to build their own platform, it’s grown into a one-stop shop for aspiring merchants and makers. A basic subscription plan costs $29 a month, and lets a seller set up a simple web store, which can then be customized with tools to do marketing, manage social media, and keep track of inventory and shipping.
“The simple answer is, Shopify has made it super easy to get into the ecommerce game as a small player and stand out on your own merit,” says Paul Munford, editor-in-chief of Lean Luxe, a newsletter focused on the modern luxury marketplace.
Shopify is moving into logistics and warehousing, meaning that it is setting up to be the alternative to Amazon. And it has a real advantage over Amazon in some ways, because it doesn’t actually compete with its customers. Placing strict liability obligations onto Shopify for whatever its customers sell would be quite a coup for Amazon, and make it much harder for smaller competitors to sell online.
The End Game
It’s not clear to me if AB 3262 will pass, for the simple reason that the Court of Appeals has already taken care of the problem in California. I suspect that most online platforms, under the standard laid out by the court, will already have to deal with liability for the products they help sell, or will make changes to reduce their level of involvement in the stream of commerce.
What’s more interesting is the shift that Amazon undertook here, flipping from refusing to take responsibility for defective products sold through its Marketplace to trying to place strict liability obligations onto everyone else involved in e-commerce, no matter their level of control or involvement in the marketing and distribution chain.
I don’t know if this is a broader shift. Opponents of Amazon in other states fighting for strict liability for Amazon can just file a supplemental brief pointing out that the company conceded the principle. It’s possible Amazon could try to argue that California is simply unique, and revert to its stance fighting against strict liability for its marketplace.
But Amazon might start lobbying for standards it can meet but that others cannot, which would be a strategic shift. And if it is such a shift, it would very similar to what Amazon did with sales taxes. From its founding in 1994, Amazon exploited a legal loophole allowing mail order companies to collect sales taxes only in states in which they had physical facilities (which is why Bezos located the company in Washington instead of the much larger end-market of California). Amazon thus could sell at a competitive advantage by locating facilities in as few states as possible, letting customers avoid sales taxes. When Amazon’s growth of warehousing facilities made such a strategy impractical, the company flipped (though not for its third party merchants), and argued for closing that loophole, so upstarts couldn’t use it against Amazon. It also started extracting tax concessions for locating warehousing facilities in a state, giving it a different powerful competitive advantage.
What I find so interesting about this dynamic is just how sprawling Amazon actually is. The company has faced dozens of suits all over the country over how to handle defective products, and it has fought for years to prevent consumers from being able to get redress when they are buying through online commerce. Now that legislators and judges are pushing back, Amazon may go in the opposite direction, and if it does, I suspect that the laws around product liability will change very quickly. Amazon is now so big that public policy is also a creature of Amazon. Hopefully, well-meaning and hardworking political leaders like Mark Stone will take their pro-consumer thinking and meld it with an approach that opens up markets for competition. I suspect that will eventually start happening.
Regardless, Amazon, like all big businesses, is a creature of public policy. Bezos knows it, and has structured his corporation’s culture and strategy around maximizing its political advantages. Amazon’s seeming shift on defective products illustrates just how central politics is to the corporation’s success. Most big companies see themselves as being in a specific set of businesses, an energy company, an airline company, and so forth. Bezos has recognized that in a society whose laws allow monopolies and corruption, corporations do not exist to house businesses. Instead, Bezos has created a trading company dedicated to using its physical plant to find legal loopholes and exploit them, and when those loopholes are closed, to create new ones. And that is why the great politician Jeff Bezos is the richest man in the world, at a $200 billion plus net worth.
Google Antitrust Case Details Emerging: Antitrust investigators are looking at Google’s conduct in the advertising technology space, focusing on the practice of ‘tying,’ which means conditioning the sale of a product on the sale of a different related product. Google ties a lot of its products together, such as its Android operating system for mobile phones and its search engine for which it faced EU and Russian antitrust claims. DOJ investigators seem focused on the adtech part of Google’s business, which is the plumbing underlying how publishers and advertisers buy and sell display advertising. They are also looking at search, though it does not seem as significant a focus of the investigation.
Meanwhile, the politics for Google keep getting worse. This week, Republican House Leader Kevin McCarthy said of Google, "They're doing worse than they were before ... they now have Democrats and Republicans very concerned.” McCarthy also mentioned the monopoly word.
Epic Games vs Apple Civil War Follow-Up: Last week, I wrote up how Epic Games CEO Tim Sweeney kicked off a civil war in American business with a suit against Apple after Epic changed its Fortnite app to avoid Apple’s payment system. Apple responded by removing Epic's Fortnite game from the App store. It also tried to destroy Epic’s main line of business, which is the operating system Epic makes for third party game developers known as the ‘Unreal Engine.’ Apple was going to effectively prevent developers from using the Unreal Engine in their games, and doing so would really harm Epic far more than removing Fortnite from iPhones, and would also harm many third party application makers who use the Unreal Engine to produce their games and products.
Microsoft then intervened on Epic’s side. The judge in the case, Yvonne Gonzalez Rogers, issued a temporary restraining order barring Apple from blocking the Unreal Engine, though letting Apple block Fortnite. A host of businesses are speaking out against monopoly now, including Jeremy Stoppelman of Yelp and David Heinemeier Hansson of Basecamp. Even Mark Zuckerberg claimed Apple is charging ‘monopoly rents,’ when Apple blocked Facebook from engaging in targeted ads in a certain slice of its business on iPhones.
Bain Capital Seeks to Monopolize Marching Bands: Bain Capital’s subsidiary Varsity just cut a deal to set up events with the Drum Corps International, the governing body for school marching bands. Varsity has already monopolized cheerleading by controlling the nonprofits who organize the sport, and it is now seeking to extend its power into other school spirit related industries, like bands. The theory of skeptics here is that DCI is apparently losing a lot of money because of Covid, so this deal could create a dependence on Varsity, which will be able to exploit its power after the pandemic is over.
Private Equity Is Back, Baby: Dividend recapitalizations are here again; Baltic telecommunication firm Bite and U.S.-based Epicor Software Corp are borrowing money in the debt markets so they can pay their PE owners dividends. Nature is healing.
Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
P.S. I found this note from a reader interesting.
This is unrelated to Epic but I know supply chains + China, have been a big topic for you and I have a personal story (I promise it’s not long). I ordered one golf club direct from a company based in Portland, OR and me being naive, new to golf and based in Seattle, I figured it’d be here in a week or so.
At the moment, it’s been three weeks and still no club. I did some very basic googling and found out about golfs reliance on Chinese manufacturers: https://mygolfspy.com/behind-the-curtain-just-who-is-designing-your-golf-clubs/
The article focuses on IP but it details the relationship between major golf OEMs and China. This obviously isn’t unique to golf but like a lot of things during the pandemic, this stuff was either hidden or unknown and now it’s out in the open.